Notes 11/30: Bitcoin Price, Regulation

Bitcoin price is showing signs of life after remaining range-bound for most of last month, amid a widening crisis in the cryptocurrency ecosystem. The premiere cryptocurrency had been trading in the $15,000 to $17,000 price range as the contagion from crypto exchange FTX’s collapse claimed more victims.

Inexplicably, it broke past the $17,000 mark this morning. Some analysts attributed the slight jump price jump as anticipation of Fed Chairman Jerome Powell’s speech at the Brookings Institution this morning.

It turned out to be a good omen.

A Moderation Boost

In his speech, Chairman Powell suggested a moderation in the agency’s aggressive interest rate hikes to stem inflation until it reviews the results of its tightening strategy. The hikes have sapped liquidity and demand for alternative investments like cryptocurrencies.

A stance of relative ease, one in which the Fed backs off from 75-basis point increases to lower figures, could leave more funds for investors to put into crypto. As of this writing, bitcoin is trading at $17,051.82, an increase of 3.82% from a day earlier.

Bitcoin’s gains were not widely shared across the crypto ecosystem. The price for ether, which has anointed itself as “ultrasound money”, fell by 4% to $1,170 after a whale trader – a blockchain address with an unusually large number of tokens – moved 73,224 ETH, worth $85.7 million, to Binance.

The transfer to an exchange might be indicative of a future trade – a sale or use as collateral – of the tokens. It can also induce more volatility into the overall ecosystem as ether is used in many derivatives, such as staked Ether (stETH).

“An Artificially Induced Last Gasp”

For some, the mere suggestion of an increase in bitcoin prices may be cause for celebration in an industry wracked by catastrophes daily.

The European Central Bank (ECB) is here to wreck their party. The agency described bitcoin’s price increase this morning as an “artificially induced last gasp before the road to irrelevance” in a blog post on its site.  

It provided three reasons for this conclusion: lack of legal transactions on bitcoin’s blockchain, the absence of a common regulatory approach to cryptocurrencies across different jurisdictions, and the “reputational risk” to banks and financial services arising from the inherent volatility and instability of cryptocurrencies.

Their points are, of course, correct. Crypto’s unregulated ecosystem has spawned innovation and greed alike.

Events since this past June have highlighted more of the latter. The tumble of bankruptcies and scandals in crypto have exposed the toxic and interrelated nature of its ecosystem. Cleaning and accounting for it will take time since crypto, largely, is an opaque ecosystem of hashed addresses, unverified customers, and fake trading volumes.

A Moment of Cheer, Perhaps?

It might be a mistake to refer to current developments as a “last gasp” or a “fading into irrelevance” for cryptocurrencies, however. That an overwhelming majority of cryptocurrencies will cease to exist after current upheavals is almost certain. Crypto as an asset class will also mutate or become comatose.

But the idea suggested by cryptocurrencies – a decentralized alternative of distributed ledgers to transfer value and speed up monetary transactions – has already established itself in the financial services industry. Central Bank Digital Currencies (CBDCs) are also becoming a popular means to accelerate inclusion in developing economies.

Crypto’s dying gasp may also be a moment to cheer the discussions of money, and its intersection with technology, provoked by it.  

Will Crypto’s “Lehman Moment” Bring Regulation?  

At the New York Times Dealbook Summit this morning, Treasury Secretary Janet Yellen called FTX’s collapse crypto’s “Lehman Moment”.

That moment in 2008 galvanized regulatory authorities and lawmakers into action and they introduced new trading rules and restrictions on Wall Street. A similar response is not forthcoming this time around. A raft of bills, some of which had the active backing of disgraced FTX CEO Sam Bankman-Fried, are unlikely to be passed by lawmakers.

Yellen told audiences that she was skeptical of crypto earlier and remained “quite skeptical” even now. Paradoxical as it may sound, that is good news. “I think everything we’ve lived through over the last couple of weeks, but earlier as well, says this is an industry that really needs to have adequate regulation, and it doesn’t,” she said.

Sen. Brown Enters Regulation Chat

Meanwhile, Senator Sherrod Brown (D-Ohio), a staunch crypto critic since its earliest days, has signaled his willingness to work on legislation pertaining to it in a letter to the Treasury Secretary.

Sen. Brown represents a hardline view of crypto in Congress. In successive hearings, while other legislators softened their stance and strove to understand cryptocurrencies, Sen. Brown had sparing praise for crypto’s potential and insisted that its prevailing ecosystem was a “mirror” to Wall Street’s worst instincts.

But, as this CoinDesk article points out, his views on legislating crypto are not public knowledge. That is critical because he is chairman of the Senate Banking Finance Committee.    Still, his offer is a good sign. Regulation ring fences trading rules and brings disclosures – things that institutional investors like. The Wild West of crypto might still be tamed.

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